Case Law Summaries

Seidman v. Spencer Savings Bank, S.L.A.

CORPORATIONS; DIRECTORS; BANKS — When the Commissioner of Banking’s approval is needed for a bank’s by-laws change, and the Commissioner of aware of ongoing controversy and litigation over the by-laws change, the Commission should include a detailed statement of reasons for its approval of a bank’s proposed change to its by-laws.

The Commissioner of the New Jersey Department of Banking and Insurance (Banking Department) approved a package of amendments to a mutual savings and loan association’s by-laws which had been adopted at a meeting of the association’s board. One of the amendments included the adoption of a provision, By-Law 31, requiring that a board candidate be nominated “in writing by a majority of the Board or by members representing ten percent or more of the votes entitled to be cast by members.” The Commissioner approved the proposed by-laws amendments in a seven-line document with no substantive commentary. Thereafter, the bank’s board of directors adopted, subject to the Department’s approval, further amendments to the by-laws, including a further revision to By-Law 31, raising from 10% to 20% the percentage of members needed to nominate a director. The board sought this change because certain board members were concerned that the bank needed protection from investors who might seek to take the association “public.” The Banking Department issued a one-page certificate which, in part, approved the proposed change to By-Law 31 without explaining its reasons for adopting the change.

A member of the association claimed it was “just about impossible” for a member to nominate a board candidate under the bank"s 10% or 20% provisions, because the bank could not disclose the names of its depositors under applicable law. The member said that the cost of a “blind mailing” to communicate with all of the bank’s members would be prohibitive. The member sued the bank, claiming subversion and abuse of the board member’s control over the democratic election process and demanded an injunction compelling the bank to mail his election materials to its members. In a separate application, he also requested that the Commissioner direct the bank to mail his materials to members. The bank opposed the member’s allegations in both proceedings, claiming that it had rejected the proposed mailing to members because it was misleading because it failed to disclose the member’s plans to effectuate a “mutual-to-stock conversion” of the bank.

The Commissioner, in a detailed written decision, denied the member’s request to have his communication distributed to the association’s members. The denial was based upon the fact that: (a) the member had not followed required procedures for applying to communicate with the members; and (b) the proposed communication the member submitted to the Department was materially different from the proposed communication that he submitted to the bank.

The member appealed the Commissioner’s determination to the courts, but the Chancery Division also denied the member’s request: (a) for an injunction; and (b) to have his mailing sent to members. On the other hand, it held that the 20% requirement in By-Law 31 had wrongfully disenfranchised members. Accordingly, it ordered a remand of the matter to the board to revisit By-Law 31, examine the need to amend the 10% requirement previously in place, and set forth the board’s reasons for any changes.

The board adopted another resolution amending By-Law 31 to require members representing 15% of the eligible voters to nominate a board candidate. The Commissioner approved the reduction of the nominating requirement in By-Law 31 without any substantive commentary. The Commissioner concluded that the board had “appropriately researched and recorded the reasons for such changes.” The member challenged the board’s decision as being arbitrary and capricious.

The Chancery Division dismissed the member’s claims against the bank. It held that, unlike the 20% voting requirement the Court had previously struck down, the revised 15% requirement was valid because the bank had “conducted a thorough investigation as to the percentage of depositors necessary to nominate” a board member. Based on this investigation, the Court believed the board’s decision to adopt the 15% requirement was protected by the principle of the “business judgment rule.” The member appealed the lower court’s determination that the 15% requirement was valid.

The Appellate Division consolidated the member’s appeal of the Commissioner’s decision and his appeal of the lower court’s decision as they related to the amendment to By-Law 31. As to the determination made by the Commissioner, it held that the Commissioner had exclusive jurisdiction to decide if By-Law 31 was valid or was in conflict with the provisions of the Savings and Loan Act (which governs mutual banking associations). It also noted that the Commissioner’s approval of the amended by-law constituted a final determination by an administrative agency, making it reviewable by the Appellate Division. The Court stated that, in approving the bank’s most recent amendments to its by-laws, the Commissioner explicitly found that the amendments had been made for a “proper purpose.” However, the Court could not tell from that conclusory statement exactly what standards of “propriety” the Commissioner applied in reaching that conclusion. It held that the Commissioner’s “bare bones” written approval did not explain what, if any, policy or regulatory considerations supported his findings. The Court found similarly uninformative the Commissioner’s observation that the bank’s board had “appropriately researched and recorded the reasons for such changes” in the by-laws. It could not discern what made the board’s research appear “appropriate.” Accordingly, it ruled that the Commissioner had to articulate the specific reasons he relied upon in reaching his determination. Although the Court was cognizant that it would be administratively burdensome for the Department to generate a detailed statement of reasons for passing upon every proposed by-law amendment presented to it, especially those of a routine nature, in this case, the Court found that the Department was surely aware that By-Law 31 was the subject of ongoing controversy and litigation. It thus remanded the matter to the Commissioner for a detailed statement of reasons for its approval of the 15% requirement. It did not, however, require the Commissioner to solicit further written submissions from the parties, although it noted that the Commissioner could request them in his discretion.